The trading of cryptocurrency is becoming more and more of a common practice in today’s world. Cryptocurrencies like Bitcoin, Ethereum, XRP, and many more are becoming household names. The IRS is aware of the increased popularity and in the past several years has brought it to the forefront of their attention to ensure taxpayers are reporting their dealings in these markets. In fact, on the very first page of all 2021 individual income tax returns, taxpayers are required to answer yes or no if “At any time during 2021, did you receive, sell, exchange or otherwise dispose of any financial interest in any virtual currency?”
The IRS is taking a harsh position on taxpayers who are not reporting their cryptocurrency transactions. They are reminding taxpayers that the consequences for not reporting these transactions can be penalties, interest and given enough non-reported income, criminal prosecution. So, if you are considering investing in cryptocurrencies, currently dipping your toe in the water or are a veteran of investing in cryptocurrencies, there are some things you need to know.
The IRS’s position is transactions involving cryptocurrency are to be treated as property transactions. Cryptocurrency transactions are therefore treated similarly to how stocks traded on public stock exchanges are treated. This means your realized gains and losses are required to be reported on your annual income tax return.
Do not assume the cryptocurrency exchanges you use are tracking these detailed transactions for you. Some are not offering this service, and some are willing to give you this service at a price. According to IRS rules, the ultimate responsibility falls to you, the investor/holder, to track all your transactions in detail and accurately report these transactions on your tax return.
The bottom line is if you buy, sell, exchange, or use cryptocurrency, then you are required to document and keep documentation that shows:
- What you bought, the date you bought it and the price you paid for it
- As well as what you sold, the date you sold it, and how much you sold it for.
This tracking is required on a transaction-by-transaction basis. You do not want to get to the end of the year and be surprised by these rules. Tracking the information as these transactions occur is a great method to ensure you have the information you are required to maintain.
These will be questions that our staff will be asking you as tax season continues. If you have any questions as to how these rules apply to you, please feel free to reach out to us. We look forward to seeing/hearing from everyone in the coming months!